The history of nontraded real estate investment trusts is littered with stories of companies that appear to have value and promise one day only to reveal a hideous portrait the next.
Several REITs that raised money in the years before the 2008 credit crisis and stock market crash repeatedly proved this rule. Sold by a broker for $10 per share in 2005 or so and listed on a client's account statement for the same amount for years, those REITs' value plummeted in 2009, 2010 and 2011.
Known as zombie REITs, these real estate companies dug their own graves by overpaying for real estate at the top of the market, taking on bad debt and paying high fees to their management.
Some of the REIT managers who saw their companies take savage hits in value included Behringer Harvard, Cornerstone, Inland and KBS.
As regular readers of InvestmentNews know, we covered the collapse of these companies closely. Financial advisers in the mid-2000s promised many of their clients that investing in nontraded REITs was reasonable and stable. Real estate never lost value, was the pitch, combined with promised returns annually of 6% to 7%.
For their trust, investors lost millions.
New industry rules have addressed the issues dogging REITs, most specifically making what investors actually pay for the product much more transparent. Fat commissions have been cut, and brokers have run away from the product. Sales have dropped accordingly.
But the REIT marketplace got a reminder earlier this month of how disastrous certain nontraded REITs can be for investors when a company associated with Nicholas Schorsch, the former nontraded REIT czar, listed on the Nasdaq.
So far, the listing of American Finance Trust Inc., which was sold in 2013 during Mr. Schorsch's money-raising heyday, has "eroded approximately $1 billion of" the company's equity value, according to a report last Thursday by Robert A. Stanger & Co. Inc., an investment bank. The listing of AFIN has turned into an ugly "belly flop," according to Stanger.
The performance of the company since it started trading on July 19 is particularly galling given that the company published an "estimated per share" net asset value of $23.56 just last month. Earlier today, shares of American Finance Trust, with the ticker symbol AFIN, were trading at $14.80 with a market capitalization of about $1.6 billion.
To recap the promise that turned into an ugly portrait: Brokers sold AFIN five years ago at $25 per share. The company recently published an estimated value of $23.56. The market is telling us, today, that AFIN is really worth $14.80 per share.
That's 40.8% less than what a broker sold it for, and 37.2% less than the company's independent board last month said it was worth.
Despite the pain felt by investors, AFIN's management inexplicably sounded pleased with the REIT's results. AFIN shares closed at $15 after its first day of trading, or $10 less than what brokers sold it for.
"This event also demonstrates the commitment we share with our independent directors to creating a liquidity event designed to deliver optimal results for shareholders," said AFIN's CEO Michael Weil, in a statement on July 19.
How on earth is the listing of AFIN an "optimal result" for its shareholders? To call it anything less than a disaster is a joke.
Michael Anderson, a lawyer for AR Global Investments, AFIN's adviser and manager, did not return a call to comment.
Mr. Schorsch is not currently an officer at AFIN. But he is the majority owner of AR Global, a closely held private partnership. Mr. Weill is also a partner at AR Global, but has a much smaller stake than Mr. Schorsch, his boss, in that company.
Both owe an explanation to AFIN's investors, as well as the advisers who sold the REIT, about the company's terrible listing. How will AFIN repair the damage and deliver better results in the future?